2019 Nov (Multiplier) Paper 3 HL

 2019 Nov (Multiplier) Paper 3 HL

If the MPC is .75 then the MPS = .25 the Multiplier Formula = 1/MPS

 

1/ .25 = 4, The Multiplier is 4

 

Investment increased by 11 million x 4 = 44m increase in RGDP

Government Spending decreased by 8 million x 4 = 32m decrease in RGDP

 

Therefore RGDP actually increased by 44 – 32 = 12m gamma

2019 Nov #3 (Exchange Rate Growth Current Account Linear Demand) Paper 3 HL

 2019 Nov #3 (Exchange Rate, Growth, Current Account, Linear Demand) Paper 3 HL

 

(a)  (i) If a visitor to Gardia from the US buys a towel that costs 23 gamma, calculate the cost in US$.

 

$1 = 6.2 gamma

 

23/6.2 = $3.71

 

    (ii) More foreign tourists are visiting Gardia. Outline the effect on the value of the gamma. Give a reason for your answer.

 

As more tourists visit Gardia, they will demand more Gamma to exchange for their foreign currency. This higher demand for Gamma’s will cause the Gamma to appreciate (become stronger).

 

    (iii) State 2 factors that could cause Gardia’s current account to be in a deficit, even though its balance of trade in goods is in surplus.

 

(Understand that the current account consists of more that just goods.)

 

·      Gardia could have a greater deficit on its service account, transport or insurance or tourism.

·      Gardia could have a greater deficit on its income account, in profits, interest or dividends on its overseas assets or in salaries paid from overseas (remittances might be included here)

·      Gardia could have a greater deficit on its current transfer/transfer payments in overseas aid or income remittances or pensions paid overseas.

 

    (iv) Determine the size of Gardia’s current account surplus/deficit when the sum of the financial and capital accounts is US$2 billion.

 

A surplus in the capital account is a deficit in the current account.

 

**A deficit of US$2 billion**

 

(b)  Gardia is aiming to increase its economic growth rate. Explain 2 sources of economic growth for economically less developed countries.

 

·      Human Capital – education or more skill training for citizens

·      Technology Development - or use of technology that increase productivity

·      Technology Adoption – adopting and implementing innovative technologies from overseas with market potential, ex electric cars

·      Institutional Changes – improving the efficiency of the legal system or establishing and protecting property rights.

·      Foreign Direct Investment – to process local materials so that there is more value added domestically or to provide appropriate technologies.

·      Expansionary Fiscal Policy – that will increase AD through raising G or lowering income taxes

·      Export Promotion – that will increase AD or that furthers vertical integration in the export sector.

·      Depreciation of exchange rates – that will lead to exports becoming more competitive/ imports less competitive: so AD increases.

(c) Calculate the additional cost of paying back the loan in gamma in 2019, due to the interest and the change in the exchange rate.

 

2018: 4 x 5.3 = 21.2

2019: 4.2 x 6.2 = 26.04

 

26.04 – 21.2 = 4.84m gamma

(d) Calculate the equilibrium exchange rate for the US$ in terms of gamma.

10 – 2g = -2 + g

add 2 to both sides

12 – 2g = g

add 2g to both sides

12 = 3g

g = 4

or

$1 = 4gamma

(e) Plot and label the new supply curve on Figure 2.

 

Qs = -.5 + g

 

Step 1 – Make (Qs zero) and solve for g

 

0 = -.5 + g

g = .5

US$ (0)  = (.5 gamma)

 

Step 2 – Make (g zero) and solve for Qs

 

Qs = -.5 + 0

Qs = -.5

US$ (-.5)  = (0 gamma)

 

Step 3  - Choose a number for Qs (greater that .5) and solve (I choose 8)

 

Qs = -.5 + g

8 = -.5 + g

add .5 to both sides

8.5 = g

US$ (8) = (8.5 gamma)

(f) (i) Using Figure 2, calculate how many US$ are needed to buy one gamma at the new exchange rate.

 

Look at the graph – equilibrium occurs at US$ (3) for gamma (3.5)

So 1 US$/ 3.5gamma = .285 or 29cents

1gamma = .29$

 

(ii) State 2 reasons that could have caused an increase in the Supply of US$.

 

·      US increases imports or Gardia increases its exports (same thing)

·      Gardia’s interest rates increase or US interest rates decrease

·      Gardia’s inflation rate (PL) falls or the US inflation rate increases

·      US incomes rise at a faster rate than Gardia’s incomes

·      More investment (financial and/or direct) flowing from the US to Gardia

·      US gov’t/cental bank using dollars to buy gamma

·      Speculative selling of dollars (because of expected depreciation)

2019 Nov (AD/AS Classical View) Paper 3 HL

2019 Nov (AD/AS Classical View) Paper 3 HL

As AD shifts to the right the economy has an inflationary economy (higher price levels and lower unemployment) this leads to businesses competing for workers which causes workers to demand higher wages/input prices, the SRAS curve shifts to the left. We return to Full-employment at a higher price level. RGDP is back to the original level.

2019 Nov (GDP FDI) Paper 3 HL

2019 Nov (GDP FDI) Paper 3 HL

 

(h) (i) Calculate the NGDP in 2014.

 

NGNI + Factor Income sent abroad – Factor income earned abroad = NGDP

291.53 + 68.30 – 8.13 = 351.70 NGDP 2014

 

(ii) Calculate the NGNI in 2015.

 

NGDP – factor income sent abroad + Factor income earned abroad = NGNI

358.97 – 75.90 + 9.49 = 292.56 NGNI 2015

(I)            Determine RGDP in 2014 & 2015

 

NGDP – Inflation = RGDP

 

The inflation rate from 2014 to 2015 is given by the Deflator (which is a price index) that measures inflation from one year to the next.

 

2014 has a Deflator number of 100, this implies that 2014 is the base year and therefore has no inflation so the NGDP = RGDP

 

RGDP in 2014 is 351.70

 

2015 NGDP is 358.97 and the deflator is 100.88

 

NGDP/Deflator x 100 = RGDP

 

358.97/100.88 = 355.84 = RGDP 2015

 

(J) Calculate the rate of economic growth between 2014 & 2015.

 

Rate of Change formula = (New – Old)/ Old x 100

 

Growth is best-determined using RGDP numbers

 

(355.84 – 351.70)/ 351.70 x 100 = 1.18%

 

(K) Outline 1 possible disadvantage of Foreign Direct Investment (FDI) for economically less developed countries.

 

·      Repatriation of profits and royalties may lead to balance of payment problems

·      Importation of intermediate goods and capital goods may lead to balance of payment problems

·      Domestic firms may be hurt as to small to compete

·      Technology employed may be inappropriate so that employment decreases

·      Income inequality may widen between rural and urban area where most MNC locate.

·      The tax contributions may be less than expected because of tax concessions and /or transfer pricing.

·      MNC’s may use their economic power to adversely influence market government policies.

·      Production by MNC’s may result in negative externalities/exploitation of resources.

2019 Nov (Unemployment/ Phillips Curve) Paper 3 HL

2019 Nov (Unemployment Phillips Curve) 

Paper 3 HL

The NRU (natural rate of unemployment) is the unemployment level at which the LRPC (long-run Phillips curve) is vertical and  that it consists of structural, (seasonal) and frictional unemployment.

2019 Nov (Fiscal Policy) Paper 3 HL

2019 Nov (Fiscal Policy) Paper 3 HL

·      An increase in Gs (government spending) is direct since Gs is a component of aggregate demand or since infrastructure or subsidies can be targeted towards key areas.

·      Spending by the government will often directly increase employment (or decrease unemployment) and thus confidence levels.

·      There may be the multiplier effect as incomes rise consumption rises also.

·      Lowering income taxes increases disposable income and thus may positively affect spending as well as confidence levels.

2019 Nov (Monetary Policy) Paper 3 HL

2019 Nov (Monetary Policy) Paper 3 HL

(b) Explain 2 reasons why low and stable inflation is desirable.

 

·      Investment Spending – As companies can predict future revenues and costs with less uncertainty/more confidence there are higher levels of investment spending.

·      Export Competitiveness – as PL (price levels) doesn’t change export sells are more competitive so trade deficits do not widen creating BOP (balance of payment) problems/ export-driven growth is maintained.

·      Income Inequality Stability – money wage earners and recipients of transfer payments do not suffer a decrease in their purchasing power as they usually cannot negotiate higher wages/payments (income inequality doesn’t widen).

·      Price Mechanism Efficiency – efficiency of the price mechanism is maintained permitting efficient allocation of resources.

·      Lenders Loss – so income is not redistributed from lenders to borrowers, so that lenders (banks) do not charge unnecessarily high interest rates/ so that borrowing  is not excessively encouraged.

·      Borrowers Loss – so income is not redistributed from consumers to other groups such as banks, shareholders or producers who would benefit from higher profits (or so income inequality does not widen)

·      Currency Depreciation – which leads to higher import prices and production costs.

·      Deflationary Spiral – prices and profits keep falling.

·      Deflationary Gap – decrease in economic activity and higher unemployment or bankruptcies.

(c) State 2 functions of a country’s Central Bank.

 

·      Regulator of commercial banks.

·      Banker to the government/ managing government finances

·      Conducting monetary policy/ control of interest rates/ control of money supply/ maintenance of price stability (control of inflation)

·      Exchange rate policy.

·      Holder of foreign exchange reserves

·      Issuer of notes and coins

·      Promoter of full employment

·      Banker to the commercial banks

·      Lender of last resort

(d) Using the data in table 1, identify 2 reasons many economists would consider Country A’s economy to be performing badly in 2012.

High Unemployment and Deflation.

The unemployment rate is 7% considered high and deflation is thought of as a negative.

Deflationary spirals may occur continually lowering price and profits.

(e) State 1 reason why monetary policy is considered to have limited effectiveness in increasing aggregate demand if an economy is in deep recession.

 

 

·      Interest Rates are already close to zero (Monetary tool of lowering interest rates to stimulate the economy cannot be used)

·      Spending depends on confidence/ indebtedness as well as interest rates (“You can lead a horse to water but you can’t make him drink” if citizens are afraid of the future they will be unwilling to take on additional debt no matter how low the interest rates are lowered)

·      Money demand may be highly sensitive (flat) with respect to interest rates.

Investment/Consumption may not be sensitive to changes in interest rates.